Education Series: Why we need Bitcoin

If you’re new to cryptocurrency you have no doubt heard about Bitcoin. People will describe it in many variations to you. It’s digital money. It’s money over IP. It’s a digital store of value. Bitcoin can be one or some or all of these things. Before we talk about the history of Bitcoin we should discuss what pain points Bitcoin is solving because it brings you to understanding why Bitcoin exists. This is the first of a three part introduction series to Bitcoin. We’ll dive into the disadvantages of our current money system, the history of it, and end with an exploration of what Bitcoin is and how it works.

Money

The last time you purchased something you used money to facilitate the transaction. Money comes in all varieties of forms. In the USA it might be in the form of a twenty dollar bill or in the form of a credit to be paid off later. No matter its form, money has three primary functions in an economy:

Medium of exchange

A unit of account

Store of value

Certain forms of money serve each of these three functions better than others. Dollar bills serve as a medium of exchange well. Gold serves as a store of value well. Money has and is accepted as a medium of exchange for thousands of years. Just go to a museum and you might see coins from the Roman Empire.

Fiat currency

Governments legally recognize certain forms of money as legal currency. These monies are called fiat currencies. People interested in Bitcoin will often cite fiat currencies as a form of money ripe for disruption. Fiat currencies differ from currencies that are collateralized or pegged by another physical asset such as gold or silver. Asset backed monies are known as commodity money. The USA abandoned the gold standard in 1933 and stopped accepting trades between dollars and gold in 1971. Arguments can be made that well managed monetary policy will lead to stability in economies and fiat currencies.

So what’s wrong with money?

The basic argument against fiat currencies are the following:

Sovereignty: Fiat currencies can be stored at banks and in some countries insured up to a certain amount. If a bank goes bankrupt in countries without insurance protection or legal frameworks are absent, then the risk of losing hard earned fiat currency exists.

Monetary Policy: Federal Banks have a variety of tools to stabilize modern economies. Among these tools is the ability to issue new currency. While certainly a useful tool, a tool is only good if used correctly. Failed inflation control policies can lead to hyperinflation and the loss of real purchasing power.

Government Seizure: In extreme situation, governments can seize assets from its citizens with little to no compensation. In 2016, the government of India withdrew 500 and 1,000 rupee notes from circulation. Citizens had to wait in long lines to turn in their notes in exchange for accepted denominations.

Bitcoin

Bitcoin maximalists may point to Bitcoin as a usurper to money as we know it today. This is unlikely to be true worldwide, but in certain parts of the world Bitcoin represents a strong hedge against failing fiat currencies. In USA where fiat currency is stable, Bitcoin can sit alongside other traditional stores of value such as gold. Now that you’re acquainted with the pain points Bitcoin solves, we’ll journey onto the history of Bitcoin and lastly to how Bitcoin works.